Bailout Efforts Now Focus On Main Street, Not Banks

Attention Santa Claus: The financial bailout has a new address—It's Main Street, not Wall Street.

Having thrown trillions of dollars at Wall Street and the financial sector, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson now appear ready to do the same for Main Street, with a spate of proposals to help homeowners and the housing market.

“It looks like they're finally getting serious about doing something, which is important,” says Robert Brusca, chief economist Fact & Opinion Economics. "There are different remedies for different circumstance and enough programs out there for enough people. I’m encouraged.”

Brusca is among the many analysts who have criticized the Bush administration—and Paulson in particular—for doing too little for homeowners struggling with a housing recession and a credit crunch, while aggressively bailing out banks, brokerages and financial institutions such as Citigroup and AIG at great expense.

That crisis management focus, however, has changed recently, perhaps because of pressure from the Democratic Party following its overwhelming general election victory and a worsening foreclosures rate that is making a bad economy even worse.

The new effort also undescores policymakers' frustration and apparent failure to lower borrowing costs and spur lending, despite a variety of unusual moves, which has included policy reversals.

“This really is the gang that couldn’t shoot straight,” says NYU professor Lawrence White, who previously served as a White House economist and savings and loan regulator.

Managing Mortgages

Criticism and second-guessing aside, the heightened efforts—which began with the Fed’s announcement last week that it would buy some $600-billion in mortgage-backed securities—has already helped the mortgage market by lowering rates.

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“Absolutely. For the first time in a long time we are seeing the market reacting to the issues,” says a somewhat ecstatic Melissa Cohn, CEO of the Manhattan Mortgage Company. “Borrowing costs in general are just too high, even as real estate prices have come down.”

Cohn says customer call volume is up 300 percent since the Fed announcement last week.

For the first time this year, the average rate on a 30-year mortgage appears to be safely and solidly below 6 percent m—and headed lower.

As CNBC first reported, the Treasury plan under consideration would buy securities underpinning loans guaranteed by Fannie Mae and Freddie Mac with the goal of pushing rates to as low as 4.50 percent.

For many in the industry, that appears to be a magic and powerful number.

The National Association of Realtors estimates that a drop from 6 percent to 4.50 percent will result in the purchase of 750,000 new homes, on top of what’s now a 5-million annual pace.

On a $200,000 house, bought with a 10-percent down payment, the difference in monthly payments is $912 vs. $1079.

“Buyers will jump in if affordability improves,” says the group’s chief economist Lawrence Yun. “The first step is to stabilize prices and absorb the inventory. As long as home price continue to decline there's very little chance of any recovery.”

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Fighting Foreclosures

Any recovery is also dependent on stemming the tide of foreclosures, say industry players and analysts, which is what makes the government’s new two-prong approach promising.

Previous measures to address foreclosures through loan modification and other kinds of forbearance, such as the Hope for Homeowners program, have been largely ineffective, according to observers in both the private sector and government.

Another obstacle to modification has been the vast securitization of mortgages, creating a multi-party dynamic to negotiation and modification.

Bernanke's proposals Thursday addressed that and touched on other key concepts such as the government purchase and refinancing of troubled mortgages in bulk, increasing the affordability of monthly payments—which might include the government assuming some of the cost of the write down—and offering more attractive inducements to lenders and firms that service the loans.

“The government becomes the lender and restructures the loan to make them sustainable,” says the American Enterprise Institute’s Alex Pollock, who was CEO of the Chicago Home Loan Bank for about a decade and recently advised Congress on the housing issue.

“Step by step, it looks like we're getting back to the 1930s’ Home Owners Loan Corporation,” he adds, referring to the government’s Depression-era entity that wound up with about 20 percent of the country’s mortgages on its books but still managed to show a profit at the time it was shut down.

Second Guessing

Though the recent measures were generally well received, there's no certainty they'll be implemented. What's more, the probable cost is unknown.

More generally, government involvement of that scale worries some for both economic and ethical reasons.

Skeptics say lower rates alone won't be effective , given the deteriorating condition of the economy.

And, as with the financial sector’s bailout, such measures put too much taxpayer money at risk while rewarding excessive risk-taking by borrowers and lenders. That could anger responsible taxpayers and homeowners, especially since the government's latest proposals lack any provisions for refinancing sound mortgages.

Others worry about the potential for fraud and exploitation, as well as the unintended—and negative—consequences of government intervention in the free markets, particularly at a time when some say there are signs individual real estate markets may be nearing or even at a bottom.

“To what extent does this prolong deflation of the housing bubble,” says independent banking analyst Bert Ely. “It’s one of the things I find troubling about a lot of these programs.”

The answer to that question, of course, as well as the overall effectiveness of the measures won’t be known for some time.

People like mortgage broker Cohn, who’ve seen their business trampled by the credit crunch, are ready to make a leap of faith.

“Everyone is looking for stabilizing factors in the economy,” she says. “The way to save the economy is by saving Main Street.”